If you have read Jared Woodard's Options and the Volatility Risk Premium you know about volatility risk premiums for different asset classes like equities and commodities. Now with proliferation of trading products on VIX and VSTOXX, it is important to measure the risk premium embedded in VIX options. The author explains the methodology developed by Peter Carr and Liuren Wu to create synthetic var-swap on VIX options (please note, there is a plus sign missing in the formula ), but uses a different formula that is developed by Gatheral. Realized volatility is computed from corresponding futures contract that has at least 12 days until expiration. The author then tests simple call and put writing strategies on the VIX.
This thesis uses synthetically created variance swaps on VIX futures to quantify the variance risk premium in VIX options. The results of this methodology suggest that the average premium is -3.26%, meaning that the realized variance on VIX futures is on average less than the variance implied by the swap rate. This premium does not vary with time or the level of the swap rate as much as premiums in other asset classes. A negative risk premium should mean that VIX option strategies that are net credit should be profitable. This thesis tests two simple net credit strategies with puts and calls, and finds that the call strategy is profitable while the put strategy is not.